The Rise of Cryptocurrencies

January 22, 2018

Written By: Alex Ferracuti

What are Cryptocurrencies?

Anyone who follows the market these days has heard of the widely talked about group called cryptocurrencies. This past year cryptocurrencies (cryptos) have become a new global craze – many are calling “digital gold”. Cryptocurrencies allow for transactions to take place worldwide, with virtual no transaction costs and a system which is very easy to use. These past few years, almost every major bank, financial firm, and government has published research on the talked about “block chain” technology. In late 2008, the first of the cryptocurrencies to emerge was the popularized Bitcoin. Bitcoin’s creator, successfully created a digital, decentralized, form of cash system, which worked in a similar way as peer-to-peer file transfer. Very briefly, cryptocurrencies work by having a large decentralized network of peers who all maintain a spreadsheet of accounts and transactions which cannot be changed unless certain conditions are met – very similar to a personal bank account. The hype around cryptocurrencies arose when markets picked up on a few special properties that the currency holds. Cryptocurrencies are a globalized form of money, making it free from any political pressure or stress, and are deemed more secure than your bank account. With a limited supply, and the anonymity that the technology holds – it is seen as one of the best ways to transfer sums of money around the world.

What is Block Chain Technology?

Block Chain is the underlying technology behind how all cryptocurrencies operate, and was invented for the sole purpose of the first digital currency – Bitcoin. People are closely studying the technology, as it has been deemed to have many more applications. In simplistic terms, block chain is a spreadsheet containing various entries that is shared around a global network of peers. The spreadsheet is updated very quickly and accurately on every computer on the network, with no interruptions of errors. There is also no centralized server containing the master spreadsheet – but computers around the globe who are a part of the network. When the spreadsheet had to be updated, all other computers “hosting” the spreadsheet must agree to the change to commit or “to build a new block” onto the existing spreadsheet. Bitcoin is an example of block chain technology which has been in operation for 10 years with zero disruptions to date. So far, its largest use is in finance – with the spreadsheet containing a list of transactions and account balances; allowing for large transactions, worldwide, that are free of costs and quick to process. This technology can be used as a global system to track or keep an account of anything, such as: land ownership, personal data, stock portfolios, and even assisting in the transfer of local energy from one party to another. Large banks around the world have recently seen the potential in block chain, and have started to implement it into their practices to both lower costs, and speed up transaction time.

Process of Crypto Mining

Cryptocurrency networks are held on a network of peers that all hold the exact same ledger/spreadsheet – which contains all previous transactions and all account balances in the crypto’s universe. For this example, we’ll use Bitcoin as our subject cryptocurrency. A transaction is committed when one person sends another party a bitcoin or fraction of a bitcoin. This transaction is signed with the sender’s private key, similar to an account signature on a bank account. It is then transmitted around the decentralized bitcoin network of spreadsheet holders, which the network has to then confirm for the transaction to become a permanent “block” in the ledger. Bitcoin miners are in sense similar to a person mining a commodity such as gold, where people are searching for a fraction to sell on the market. Miners, in the cryptocurrency sense is the network of people who all hold the ledgers. The miners are then required to confirm and approve every transaction that flows through the network, allowing for the cryptocurrency network to properly work. After every miner confirmed the authenticity of the transaction, it is then added to everyone’s ledger – to keep it current and up to date. For the miners work in confirming, approving, and actively maintaining the ledger, they get paid with a part of the cryptocurrency – similar to a transaction fee. To avoid a centralized party’s ability to spread and confirm false transactions, cryptocurrencies have a built in safety feature. When a transaction is sent through the network of peers – the transaction key is put through a cryptographic function. This function act’s as a “puzzle” that miners have to race to solve; and once it is solved, the miner who achieved it gets part of the currency added to their account. These puzzles require a lot of computing power, making it very difficult for one person or party to solve more than one at a time – allowing for consistency in the decentralized system.

How have Cryptocurrencies performed?

Cryptocurrencies have been all the hype in the markets in 2017, with many believing that block chain would eventually replace domestic currency. It has met its share of skeptics, causing cryptocurrencies to stay very volatile in interim. Skeptics have said that crypto’s are not a true currency, but more like a commodity (e.g. gold, oil, platinum). A currency in its most basic form is a storage of wealth, that is government backed, and is relative stable and easy to transact with. With cryptocurrencies continuing to fluctuate rapidly, it is difficult for two parties to use them as a safe and reliable form of currency. Last year marked the best year for cryptocurrencies; prices surged after market excitement began to rise surrounding the technology. In 2015-2016 the largest traded cryptocurrency Bitcoin stayed in the mid to high 100’s, rising slowly to around 800 at the end of 2016. Mid-2017 prices for the digital currency began to skyrocket, with momentum carrying prices into the 1000’s. Bitcoin hit its highest point around 19,000 USD in December of 2017 after a steady climb from the year before. Over all of 2017, Bitcoins performance had grown roughly 1530% in value. Ethereum and Ripple, the two other largest cryptocurrencies also grew, at a slower rate than Bitcoin. Volatility in the cryptocurrency market has continued into the early 2018’s with a major sell-off, causing major crypto’s to lose roughly half their value in under a day.

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